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UK pension funding challenges to be greater in 2013

Pensioner with cane2013 will be a worse year than 2012 for funding challenges within UK defined benefit (DB) pension schemes, Towers Watson, a pension and investment consultancy, says.

John Ball, head of UK pensions at the practice, says: “It will be hard for the regulator to repeat its argument that most deficits can be accommodated by making modest tweaks to existing recovery plans.”

The prediction is one of a number of challenges the consultancy expects in the UK occupational pensions market.

Another is for the government to propose ending the option for DB schemes to contract out of the state pension, meaning employers will have to choose between cutting back benefits for DB members and swallowing more of the costs themselves. The change is unlikely to come in until about 2016 but few sponsors have given the issue much thought, says Ball.

Also, auto enrolment opt-out rates will dramatically undershoot the 30% estimates that have been predicted as “inertia proves to be a strong force”. The main concern for 2013 is around capacity and employers selecting pension providers in the second half of the year will find that it is no longer a buyers’ market as capacity dries up and providers begin to price accordingly.

2012 had also been a difficult year, but at least data out today from State Street indicates that it was a strong year for UK DB funds’ asset returns.

UK equities, strategically important and the largest single component of the majority of funds, gained 13% over the year, outperforming the benchmark FTSE All Share index for a second consecutive year.

State Street says initial estimates for the WM UK Defined Benefit Pension Fund Universe suggest a strong year for asset returns. The expected average return for pension funds is 8%.

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